Dealing with fundamental and technical indicators that are out of sync
If you have been reading this blog for the past few weeks, it should be apparent that I believe the U.S. economy is still in bad shape. Based on weak economic fundamentals–high unemployment, poor corporate earnings, consumer spending declines, etc.–I think stocks should be falling. And yet major indices have risen about 50% since bottoming in March.
Right now technical indicators for most equity positions are positive. That includes things like relative strength indicators (RSI), short and long-term moving averages, advance/decline lines, and more. These are some of the tools we use to help us determine when to buy or sell specific positions.
I wrote recently that if technical market indicators remained positive, we would need to cautiously re-enter the market. We have reached that point. Even though we believe a significant correction is likely to occur sometime in the near future, it is time to test the waters.
In the Foundation Strategy at Strategis Financial Group, we have maintained a small position in Permanent Portfolio Fund (PRPFX) for a couple of years, including throughout this bear market. For much of last year, we hedged that long position with an offsetting position in a fund that shorts the market. We exited that short position several months ago.
In the same strategy we this week purchased an additional small position in Fidelity Intermediate Bond Fund (FTHRX). That brings the total invested portion of this strategy to about one-third, with the remaining two-thirds still in a money market fund. In the chart below, you can see that both of these funds have produced positive returns for 2009.
Because we believe market risk remains high, we have elected to adhere to a conservative approach for invested positions. FTHRX has low volatility and also carries no trading restrictions. If the market turns against us, we can quickly exit. We can also exit PRPFX at any times because we have held it for a long time and any trading restrictions have expired. But we can also hedge this position again using a short fund if needed.
If we are wrong and the market continues to advance, we would expect to eventually see improvement in economic fundamentals and we would add to our long positions. In the meantime, this toe-in-the-water approach allows us to participate in some of the gains if this rally continues.
Each of our strategies is managed separately, using a variety of criteria depending upon their objectives and risk levels. We are currently holding a couple of other small positions in specific strategies. Rest assured that we are watching the markets closely each day. Every investment decision is made with careful consideration for protecting client assets against additional major market corrections.
F.S.